Investing can be intimidating. Between the rules and restrictions on many account types, the insider industry jargon, and the fact that there's real money at risk with every move, it can be hard to get started as an investor.
To help you break through the challenges of getting started, this article shares a simple approach that you may be able to use to double your money with zero investing experience. Hopefully, that sort of return should be enough to encourage you to take that first, tough step toward becoming an investor.
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The step by step approach
You need two key things to get started: a job and a 401(k) (or similar employer-sponsored retirement plan) that has a match. Those tools can be enough to enable many people to not only become investors, but to also double their money.
To make it work, you simply need to sign up to contribute to the Traditional type 401(k) plan and have enough in contributions deducted from your paycheck to take advantage of your employer's match.
That's it. That's all you have to do. Uncle Sam, your state's tax collectors, and your boss should take care of the rest.
How this works
401(k) matches differ by company, but a common match is 50% of your contribution, up to some percentage of your base salary. That means that for every $1.00 you contribute to the plan, your boss will kick in $0.50, up until you reach that cap. That gets you about half way there.
The rest comes from the up-front tax benefits you get from contributing to a Traditional type 401(k). Contributions to a Traditional 401(k) reduce your taxable income, which means that money is not subject to regular income taxes before it gets placed into your account.
If you're in the 22% federal tax bracket and a 3% state tax bracket, that works out to a 25% marginal tax rate, unless you're one of the few who are still able to itemize deductions. That means that for every $1.00 you contribute this way, you're not paying $0.25 in taxes, so the out-of-pocket impact to you is a mere $0.75 of otherwise spendable money. That's enough to take you the rest of the way home.
After all, what just happened is that for a $0.75 out-of-pocket cost, you've just received $1.50 in your 401(k). That works out to a double of your money, and it didn't take any investing experience at all to make it happen.
Is that all there is to it?
Contributing enough to maximize your 401(k) match is such a powerful benefit that it's really the first investment you should make if you're eligible to do so. There are a few things you have to take care of, though, beyond just getting your money into the account.
First, you have to pick one or more investments within the plan to put your money to work for you. If you're just starting out on your journey and have a long time frame ahead of you, a great choice to look for is a low cost, broad based index fund. With such a fund, you're likely to get returns about in line with the market as a whole, and you won't have to worry about picking winners and losers among the thousands of stocks in the market.
In addition, you should ask yourself whether you really want that up-front tax benefit from contributing to your Traditional 401(k). The downside of those plans is that when you withdraw the money in retirement, it counts as ordinary income, which can have a big impact on your taxes and costs in retirement.
As an alternative, many companies offer a type of account known as a Roth 401(k) that lets you put in after-tax dollars up front and then take your money out completely tax free in retirement. While you lose the immediate tax benefit on your contribution, the tax free withdrawals in retirement can be worth it, especially if you wind up with a large balance in your 401(k).
The key downsides, of course, are that without the up-front deduction, it's more out of your pocket up front and you don't get quite the same 'multiplier' help on your initial contribution. So recognize the trade-offs and figure out where along the spectrum between 100% Traditional to 100% Roth contributions work the best for you. In many companies, you can mix-and-match between the two, so you're not typically locked to an either/or situation.
What are you waiting for?
No matter which path you choose, a key reality of investing is that if you want to earn the returns, you have to take the action to get your money invested in the first place. With a path in front of you to potentially double your money even without any investing experience, why would you wait any longer? Get started now, and get yourself on the path to a brighter financial future.
